terça-feira, 10 de março de 2015

Martin Wolf: India has a real chance to excel on growth

The most significant economic story of the past three and a half decades has been the rise of China. The second most significant story has been the rise of India. A big question is how fast the latter can grow. The answer is that it has an excellent chance of being the fastest-growing large economy in the world. But this requires significant improvements in policy and its implementation. The government of prime minister Narendra Modi, elected last May, has at least made a start.

Between 1980 and 2014 China’s average gross domestic product per head grew 17 times, according to the International Monetary Fund. In the same period India’s GDP per head grew fourfold. That is a huge gulf. But India’s achievements are significant. Hundreds of millions of Indians have experienced identifiable improvements in their living standards.

Furthermore, the country has many strengths: a legitimate political system; a youthful population; substantial technological and entrepreneurial resources; and, not least, room to catch up on the world’s richest economies.

According to the IMF, India’s GDP per head at purchasing power parity was 11 per cent of that of the US in 2014. China passed that mark a decade earlier. This lag is an opportunity. Growth is not everything. But, for a country as poor as India, it is necessary for alleviating mass destitution and widening opportunity.

The immediate conjuncture is also favourable for a shift to higher growth. This year’s government Economic Survey of India waxes lyrical, arguing that the country has reached “a sweet spot — rare in the history of nations — in which it could finally be launched on a double-digit medium-term growth trajectory”.

The international environment is favourable, particularly low oil prices and recovery in the US and Europe. As the survey notes, the deceleration in growth has ended and the economy appears to be recovering. Moreover, it adds, “challenges in other major economies have made India the near-cynosure of eager investors”.

Yet the idea that India is on the verge of 10 per cent growth is vainglorious. The slowdown after 2010 punctured a similar euphoria. True, in 2008, gross investment reached 33 per cent of GDP, before falling to 28 per cent last year. Yet even 33 per cent is likely to be insufficient to drive growth at a sustained 10 per cent a year. When China grew that fast, its investment rate was over 35 per cent of GDP and in many years far higher. Also, as the Indian budget recognises, shortage of physical capital, particularly infrastructure, remains a binding constraint. Without big changes, 8 per cent is a likely upper bound to the growth rate. (See charts.)

How far, then, has the new government improved the economic prospects? A part of the answer is that it has been fortunate: the collapse in the price of oil has been a pure windfall. Another is that Mr Modi’s election has improved confidence. As an IMF paper has argued, the sharp slowdown in investment that was the proximate cause of India’s recent decline in growth, was partly due to rising uncertainty ahead of the election.

But a final part of the answer is that the government is making sensible reforms, though, as was to be expected in India’s complex democracy, these have fallen far short of a pro-market “big bang”. Yet note that the World Bank’s Doing Businessranking places India 142 out of 189 countries. Given this, modest reforms might deliver significant improvements in performance.

Which of the changes announced before the budget and within it are likely to be important? Deregulating the price of diesel was a good signal, though the opportunity afforded by low oil prices made it quite easy. So, too, is the shift towards open auctions of licences to mine coal. Plans to move towards direct cash transfers to the poor could reduce the costs of in-kind benefits and subsidies. Unfortunately, the budget did not make substantial reforms to wasteful expenditures.

Important, too, is the decision to move towards a national goods and services tax. This is a vital step towards creating a single market, something that India still lacks.

Also significant is the new “monetary policy framework agreement” with the Reserve Bank of India, which takes the country towards a modern relationship between government and central bank. Another big (and controversial) reform would make land acquisition less onerous, thus easing development.

From the economic point of view, the most important near-term requirement must be a massive improvement in infrastructure. That should also promote private sector entrepreneurship and investment. The government decided to delay fiscal consolidation, in order to finance public investment. If the investment is efficient, this makes good sense. An economy where nominal GDP is likely to grow by at least 12 per cent a year in the medium term can run a sizeable fiscal deficit while keeping its public debt well under control. In India, fiscal deficits matter to the extent that they crowd out private investment, which is not much of a concern at present, or are used to fund wasteful spending. Consolidation is not a particularly high priority right now.

In its presentation of the Economic Survey, the office of the chief economic adviser, Arvind Subramanian, refers to the possibility that “a persistent, encompassing and creative incrementalism” might add up to quite a bang. Whether such incrementalism will be delivered is still unclear. But, provided the government persists with reforms and keeps the scale of the opportunity in mind, the economy should now revive. Sustained growth of 7-8 per cent a year is certainly possible. More is at least conceivable. The change within India and in its relationship with the world will also be incremental. But a new force is rising.